Exchange rate shocks and firm behaviour: Evidence from Ethiopia and Uganda

Project Active from to Firms and Firm capabilities

As developing countries, Uganda and Ethiopia frequently face exchange rate shocks. The effect of exchange rate shocks on the performance of firms is not well understood. In Ethiopia, policymakers devalue the local currency to correct misalignment. The effect of such devaluation is of interest to policymakers.

Manufacturing firms in developing countries rely on imported inputs, which in turn makes them vulnerable to exchange rate shocks. This study will use administrative data from the Customs and Revenue Authorities in Ethiopia and Uganda, to examine the impact of shocks on manufacturing firms. This will be done in two ways:

  • Establishing the impact of exchange rate shocks on domestic producer prices. As most manufacturing firms are dependent on imported inputs, exchange rate shocks will affect both costs and productivity.
  • Examining how firms deal with such shocks and whether some kinds of firms are better able to do so with a focus on size and productivity.

Transaction level customs data will be used which contains information on the source country, product type, currency of invoicing, and local prices to estimate the price pass-through of largely exogenous exchange rate movements. These price changes can be linked with the import quantity and type of each firm to generate firm-level exchange rate shock parameters to estimate the impact of these shocks on the performance of firms.

The customs data includes transaction-level data between 2008 and 2018 for Ethiopia and Uganda. The firm-level information is from the annual large and medium scale manufacturing firms of the Central Statistical Agency of Ethiopia and the Census of Business Establishments for Uganda.